Transcript Taxation for the 21st Century: The Automated Payment

Presentation to the President’s Advisory Panel on
Federal Tax Reform
Taxation for the 21st Century:
The Automated Payment Transaction
[APT] Tax
May 11, 2005
Edgar L. Feige
University of Wisconsin-Madison
The Problem
Our Current Tax System
• Overly Complex – Opaque
– Annual administration and compliance costs ≈ $200 Billion
• Inefficient
– Annual misallocation costs - ≥$300 Billion
• Inequitable
– System is perceived as unfair, non-progressive and riddled with
loopholes favoring the wealthy and special interests.
• Tax Evasion
– Annual evasion costs ≈ $325 Billion
The Challenge
• To design an alternative tax system that is:
– Revenue Neutral
– Simple – Comprehensible-Transparent-Stable
– Efficient – Minimal allocation distortions - lowest
possible tax rate - broadest possible tax base.
– Equitable – treats all individuals fairly and is
progressive.
– Relatively costless to administer and comply with.
– Growth promoting.
The APT Tax Proposal
• Replace federal, state and local personal and corporate
income taxes, excise, capital gains, import and export
duties, gift and estate taxes with a single comprehensive
revenue neutral flat rate tax on all voluntary transactions.
• Eliminate all deductions, exemptions, credits, exclusions
and adopt “zero tolerance” policy on any form of “tax
expenditure.”
• Collect the tax automatically at the source of payment,
namely, through the banking/payment clearing system
when financial accounts are credited and debited.
Currency is taxed as it is withdrawn from and deposited to
the banking system.
Special Features
• Revenue Neutrality is achieved with a tax rate ≈ .6% on
estimated tax base of ≈ $337 Trillion. The buying and selling
party to each transaction pays ≈ .3% on each transaction.
• Highly progressive – Since tax base is heavily skewed toward
the wealthy who undertake the bulk of asset exchange
transactions. Progessivity is automatically introduced through
the tax base.
• Eliminates filing of all information and tax returns. Automated
assessment and collection is the electronic financial equivalent
of a highway EZ pass.
• Highly efficient – lowest conceivable tax rate on largest
conceivable tax base. Eliminates most costs of compliance and
administration.
• A public brokerage fee assessed by government to pay for the
provision, maintenance and use of the monetary, legal, military
and political institutions that facilitate and protect free market
trade and commerce.
Benefits
• Elimination of current system promises potential
annual savings ≈ $825 Billion in efficiency, compliance
and evasion costs.
• Simple to understand, transparent, stable.
• Equitable – progressive – non invasive.
• Shifts tax burden away from wealth producing
(positive sum activities) to wealth redistributing (zero
sum) activities thereby stimulating economic growth.
• Lengthens holding periods for equity and debt,
stabilizing markets and stimulating real long term
investments.
• Stimulates home ownership because of low turnover of
owner occupied housing.
Potential Costs
• Every tax system introduces costs and distortions and the APT tax
is no exception. These new costs require empirical documentation
and must be shown to be of a magnitude approaching the $825
billion – the gains in annual savings from scrapping the tax
current system.
• New costs
– Transition costs.
– Costs of administration.
– Distortions introduced by cascading of intermediate payments.
– Costs of increased vertical integration.
– Costs of reduction in liquidity of asset markets.
– Costs of attempted evasion.
Appendix
• Choice of tax base.
• Determination of “revenue neutral” tax rate.
• Equity – Distribution characteristics of the tax
base.
• Administration and compliance.
• Simplicity, transparency and privacy.
• Efficiency effects and distortions.
• Benefits and costs.
Choice of Tax Base
• Most taxes are based on income or consumption and
tax these transactions at rates between 5-40%.
• Strange choice since societies would like to raise income
and consumption standards but high tax rates reduce
both.
• The voluntary transaction can be viewed as the
fundamental element of economic activity.
• The APT tax proposes to expand the tax base to the
largest conceivable base, namely to each and every
transaction undertaken in the economy.
• Every transaction involves a voluntary exchange (trade
or transfer of property rights to goods, services and
assets) between a buyer and a seller. Therefore every
transaction voluntarily undertaken must improve the
perceived well being of both parties.
Tax Rate Determination -Mechanics
• Single flat rate (t) to be determined.
• t=R*/[T] where R* is required revenue (given) and T is
the estimated volume of transactions (= payments) that
will be undertaken after the tax is imposed.
• 2001-2002 Required Revenue Simulation: R=$1.821
Trillion.
• Initial tax base is estimated to be $674 trillion. We shall
assume that total transactions fall by 50% so that the
effective tax base will become ≈ $337 Trillion debits.
Transaction Estimates for the US
Figure 1
United States Estimated Initial Tax Base
900
Dollars (Trillion)
800
700
600
500
400
300
200
100
0
80
81
82
83
84
85
86
87
88
89
BIS Payments
90
91
92
93
94
95
96
Debits 1 + Domestic cash payments
97
98
99 2000 2001 2002
Revenue neutrality requirement
Table 1: Revenues to be replaced by APT Tax for 2001-2002
Federal[1]
State
Local[2]
Dollars (Bil.)
Dollars (Bil.)
Dollars (Bil.)
Percent
Individual Income Tax
$970
$203
$1173
64%
Corporate Income Tax
$176
$28
$204
11%
Excise and Customs Tax
$85
$324
$409
22%
Estate and Gift Tax
$28
$7
$35
2%
Total
$1259
$562
$1821
100%
Revenue Source
[1] Budget
and
Total
of the United States government: Historical Tables: Tables 2.1 and 2.5
Report of the President: 2005 Table B-86
[2] Economic
Table 2: Effective APT Tax Base and Required Revenue Neutral
APT Tax Rates - 2002 Data
Potential Percentage Reduction in Initial Total
Payments
10%
20%
30%
40%
50%
60%
70%
Effective Tax Base ($Trillion)
$606
$539
$472
$404
$337
$270
$202
Tax Rate Per Transaction (%)
0.30
0.34
0.39
0.45
0.54
0.67
0.90
Tax Rate Per Transactor (%)
0.15
0.17
0.19
0.23
0.27
0.34
0.45
Source: Author’s calculations
Required revenue neutral tax rate
• A conservative estimate of the APT flat tax rate
required to raise the same amount of revenue as the
2001-2002 tax system (federal and state) is roughly .6
percent per transaction. This calculation assumes that
total transactions fall by roughly 50%.
• This amounts to a public brokerage fee of .3% paid by
the buyer and seller to each transaction.
Equity
• Most flat rate taxes are regarded as
inequitable. Citizens desire an effective
progressive tax structure.
• In APT tax, progressiveness is provided
through the tax base rather than the structure
of tax rates.
• Transactions are highly skewed toward the
wealthy.
• Flat rate APT tax is progressive.
Distribution of Net Worth and Transactions
Distribution Effects
Transactions (Credits and Debits) are highly skewed.
Administration and Compliance Costs
• The APT tax exploits a natural discontinuity in the
administration and compliance cost function.
• Compliance costs depend upon the need to distinguish
between taxable and non taxable transactions and
deductible and non deductible expenses.
• Taxing all transactions with no deductions or
exemptions minimizes the cost function.
• Estimated to save $200 billion annually.
Administrative collection features
• Tax is automatically collected by bank or financial
institution via a tax escrow account.
• Software automatically and permanently links the tax
escrow account to each account capable of settling a
final payment.
• No deductions or exemptions are permitted.
• Currency is taxed as it enters and leaves the banking
system. The tax rate on currency is a multiple (3 times)
of the rate on bank debits to allow for the turnover
velocity of cash between the time it leaves and reenters
the banking system.
• This eliminates the tax evasion associated with the cash
underground economy.
Administration and Compliance
• New administrative costs – System conversion.
– Guarding against payment systems fraud.
– Defeat counterfeit payment systems.
• Compliance costs reduced to minimum.
• Automatic assessment and collection.
• No tax or information returns.
• If intermediate payments are allowed to be exempted
through a net VAT collection system this will introduce
new costs and greater complexity.
Low costs for banks, individuals, firms and
the government
• Banks – Banking system already collects all necessary
information in the normal course of doing business
• Individuals – Collection is automatic-No forms Virtually costless compliance.
• Firms – No more filing of information and tax returns.
• Federal Government – Administration requires
auditing of several thousand financial intermediaries
instead of 100 million taxpayers.
• State Government – Can piggyback APT tax collection
on resident’s bank accounts.
Simplicity, Transparency and Privacy
• Every taxpayer has real time record of all taxes
paid.
• Government is paid from Escrow Account.
Real time collection.
• Government can not monitor individual
transactions.
• Government expenditures are explicitly in
government budget, not in hidden tax
expenditures.
Efficiency Effects-1
• Shifts burden of taxation from wealth producing to
wealth redistributing activities.
• Lowest marginal tax rate, lowest deadweight welfare
losses.
• Cannot prevent currency and banking crises but will
reduce short term speculative trading and hence reduce
variance of exchange rate fluctuations and
international capital flows.
• Incentives for ex ante investment in information rather
than asset churning for short term gains.
Efficiency Effects 2
• Shifts term structure of financial assets to long term
investments.
• Favors home ownership since owner occupied housing
represents a long term asset holding with an average
turnover frequency of only once every ten years.
• May have negative effect of providing incentive for vertical
integration.
• Introduces new distortions resulting from cascading effect
on final products with many stages of production.
• Cascading issue can be eliminated by permitting producers
(at their expense) to adopt net VAT collection procedure, but
this will complicate an otherwise seamless system.
Advantages
• Greatest benefit is elimination of current system with
all attendant distortions.
• Greatly reduces collection, administration and
compliance costs.
• Shifts political focus away from opaque taxation
expenditures toward more transparent direct
government expenditures.
• Promotes equity, simplicity , transparency and
perception of comprehensibility and fairness of tax
system.
Special features
• Payment for state services via brokerage fee.
• Entry ticket to free market exchange.
• Government is not a party to exchanges, therefore
longer participates in gains or losses of individuals or
firms.
• Eliminates all tax expenditures.
– Improves transparency.
– Total burden of government expenditure is shifted
to budget process.
Summary
• APT tax is “revenue neutral” but not “distribution
neutral”.
• Efficient and Equitable.
• Simple and Comprehensible.
• Transparent and Private.
• Low cost of administration and compliance.
• Increased level of compliance.
Summary of potential benefits and costs
• Benefits: Elimination of Current System
• Potential Estimated gains
– Allocation costs -------------$300 Bil.
– Compliance and administration - $200 Bil.
– Reduced evasion -------$325 Bil.
– Total estimated annual benefits -- $825 Bil.
• Costs – To be empirically documented.
– Transition and administration costs.
– New allocation costs.
– Total costs are highly unlikely to approach expected
benefits.